Self-Employment Tax

Self-employment tax is the combined Social Security and Medicare tax that self-employed individuals — including sole proprietors, independent contractors, and single-member LLC owners (taxed as disregarded entities) — must pay on net self-employment income, currently totaling 15.3% (12.4% Social Security on income up to the wage base of $168,600 in 2026, plus 2.9% Medicare on all net earnings, plus an additional 0.9% Medicare surtax on earnings exceeding $200,000 for single filers or $250,000 for married filing jointly). Unlike W-2 employees who split FICA taxes 50/50 with their employer, self-employed individuals pay both the employee and employer portions — though the employer-equivalent portion (50% of self-employment tax) is deductible as an above-the-line adjustment on Form 1040. Self-employment tax is calculated on Schedule SE using 92.35% of net self-employment income (the 7.65% reduction approximates the employer's FICA deduction that employees receive). For a self-employed individual earning $150,000 in net profit, the self-employment tax bill is approximately $21,194 — a significant cash outflow that many new business owners fail to anticipate when transitioning from W-2 employment. The most effective legal strategy for reducing self-employment tax is electing S-Corp status for the LLC or incorporating as an S-Corp, which splits income between reasonable salary (subject to FICA) and distributions (not subject to self-employment tax). The break-even point where S-Corp tax savings exceed additional compliance costs typically falls between $50,000 and $80,000 in annual net business income. Self-employment tax obligations also require quarterly estimated tax payments (Form 1040-ES) to avoid underpayment penalties, adding cash flow planning complexity for seasonal or variable-income businesses.